Tuesday, May 27, 2014

There is growing national concern that consolidations of healthcare providers are leading to higher prices for healthcare services. The June 2014 issue of the policy magazine Health Affairs includes four separate papers that propose a range of policy options to try and address this issue. Unfortunately, those hoping for answers will not find the Health Affairs papers very satisfying. Not only is there little agreement among the authors about what to do, most of them do not express much enthusiasm about either the feasibility or benefits of the options they do identify.

False Premises Lead to Wrong Conclusions

Most policy prescriptions about prices and market power are based on three fundamentally false premises:

False Premise #1: Consolidation of Providers is Necessary and Desirable (In Fact, It’s Not). Contrary to popular belief, there is little evidence that consolidation is either necessary or sufficient for either better care coordination or greater efficiency of care delivery, whereas there is evidence that appropriate competition can lead to lower prices and higher quality. Moreover, there are many examples around the country of small physician practices and small hospitals providing high quality, efficient care while remaining independent. Since consolidation isn’t necessary to achieve the better healthcare everyone is seeking, instead of promoting consolidation and trying to figure out how to control the resulting market power, it would make more sense to find ways to make improvements in care delivery without consolidation.

False Premise #2: The Payment System Isn’t the Problem (In Fact, It Is). A major cause of both consolidations and demands for higher prices is the way we pay for healthcare today, and many so-called “payment reforms” are actually making the problem worse, not better. We need radically different payment systems for both physicians and hospitals in order to get better quality care at lower cost. If a payment system can only be implemented by a large provider organization, the solution is to redesign the payment system, not to try and control the prices charged by the consolidated organization.

False Premise #3: Price and Utilization Are Independent (In Fact, They’re Not). What should matter to purchasers is how much they spend on healthcare in total not how much they pay for individual services. In some cases, the prices of individual services may need to increase in order to support lower utilization and lower overall spending. Conversely, demanding lower prices may simply result in higher utilization and higher overall spending, or it may force providers to consolidate in order to resist what they see as unreasonable pricing demands. “Narrow networks” that promise to send a provider more patients in return for discounts simply reinforce the idea that volume is more important than value. Moreover, narrow networks are short-term strategies – if a payer gets a discount by shifting business to a subset of providers this year, what will it do next year? Will it force patients to switch doctors and hospitals every year in order to get a discount from the members of the new narrow network? And if there is only one hospital in town, how can one “narrow” the network or send the hospital more volume?

We Don’t Pay Hospitals and Doctors For What We Really Want Them To Do

When we’re injured, we want a hospital close by that is ready to treat the injury quickly and effectively. When we have the symptoms of a heart attack, we want a hospital close by that is ready to quickly and accurately determine if we’re having a heart attack and if so, to treat it quickly. If a disaster strikes our community, we want a hospital close by that can respond rapidly and treat all of those who are injured.

But we don’t pay hospitals to be there when we need them. We only pay them when they actually do something for us. If you’re not injured, the hospital doesn’t get paid for having the emergency room staffed and ready for you. If you don’t have a heart attack, the hospital doesn’t get paid for having a cardiac catheterization lab organized to ensure you have a low door-to-balloon time. If your community doesn’t have a disaster, a terrorist attack, a flu epidemic, or any similar unfortunate event, the hospital doesn’t get paid for the capacity it has created and the preparations it has made to deal with such events.

The hospital maintains a certain amount of standby capacity as a form of insurance for the community so it can respond to needs when they arise, and then it adds additional capacity in response to both actual patient needs and discretionary choices that physicians and patients make. However, Medicare, Medicaid, and commercial health plans pay only for the services provided, not the “insurance” of the standby services. As a result, the hospital has to treat enough patients in order to generate the revenues needed to cover its standby capacity, and that can lead to overutilization.

Not only do we expect hospitals to be there when we need them, we expect hospitals to care for people whether they can pay or not and to care for patients on Medicaid even if the Medicaid payment is less than what it costs to deliver care. As a result, hospitals have to charge the paying patients more in order to cover the losses they incur on the under-paying and non-paying patients.

Physicians face many of the same kinds of problems with current payment systems that hospitals face. What we really want a primary care physician to do is to keep people healthy, but a PCP isn’t paid at all if a patient doesn’t need office visits or if a problem can be handled over the phone. We’d like specialists to take the time to help patients decide whether they need a risky, invasive procedure, but if fewer patients choose to have the procedure, the specialists may not have enough revenues to cover their practice expenses, even though the patients may be better off. And if you think it’s only the hospital that needs to be available 24/7, imagine how the hospital will treat anyone during the night or on a weekend if there isn’t a physician available during those same times. However, physicians aren’t paid by Medicare or health plans to be available in case patients need them in the hospital, only hospitals pay them for that.

If doctors and hospitals do a better job of keeping patients well, they may need to be paid more for the patients who do get sick in order to continue covering the fixed costs of maintaining hospital standby capacity and the operating costs of physician practices. However, even with higher payment for individual services, overall spending can still be lower if fewer patients need expensive treatment.

Current Payment Reform Proposals Make the Problem Worse, Not Better

Although there is growing recognition that changes in payment systems are needed, most of the payment reforms being discussed or implemented by Medicare and commercial payers don’t really solve the problems with the current payment system and they may actually make some aspects of the problem worse.

Episode Payments Based on Procedures Reward Volume. Most of the episode payments and bundled payments being implemented by Medicare and commercial payers are triggered by a particular procedure in the hospital. The episode payment disappears completely if the patient doesn’t need to be hospitalized or if the hospital uses a different procedure to treat the patient, so the physicians and hospital are still penalized for reducing avoidable admissions and procedures.

“Shared Savings” Penalizes Providers For Lower Volume. If a hospital and physicians can avoid the need to admit a patient to the hospital, both the hospital and the physicians will lose 100% of the revenue they would have been paid for that patient, but their costs won’t decrease proportionately. Giving the hospital and/or physicians a shared savings bonus payment a year later will likely result in too little, too late to cover the costs the hospital and physician already needed to incur.

Shared Savings Programs Force Hospitals to Acquire Primary Care Practices. If a hospital successfully reduces readmissions, avoidable procedures, or infections and complications, none of the resulting savings will be returned to the hospital under most shared savings programs unless the primary care physicians for those patients are employed by the hospital. So under shared savings programs, hospitals are forced to hire primary care physicians, not to promote “clinical integration,” but merely to protect their own revenues.

The Right Approach: True Payment Reform

What’s needed are true payment reforms – accountable payment systems that give physicians and hospitals the flexibility to redesign care, reward them for keeping patients healthy, pay them adequately for treating the patients who do need care, and give them accountability for ensuring that costs are lower and quality is higher. Several different approaches to accountable payment systems could be used:

Condition-Based Payment. Under condition-based payment, doctors and hospitals would be paid based on the types of health problems the patient has, not based on the specific procedures used to treat them.

Partial Capitation. Under partial capitation, a hospital or physician practice would be paid based on the number of patients whose care they are managing, with additional payments made for expensive services based on the marginal cost of those services.

Risk-Adjusted Global Payment. Under a risk-adjusted global payment, a physician group, physician IPA, physician-hospital organization, or health system would have an overall budget for delivering healthcare services to a population of patients. The budget would be increased if the health needs of the patients increased.

All of these payment systems would support the ability of physicians and hospitals to deliver better care at lower cost. Although in most cases, solo/small physician practices and independent hospitals would not be able to manage these types of payments on their own, there is no need for them to merge or consolidate to do so. Physicians can work together through an Independent Practice Association and physicians and hospitals can work together through a Physician-Hospital Organization to manage accountable payment systems.

What About Prices?

While better payment systems are a necessary element of a solution to controlling healthcare costs, payment reform isn’t sufficient. In addition to payment systems that reward providers for keeping patients healthy rather than giving them more expensive treatments, we also need ways to ensure they keep patients healthy at the lowest possible cost.

Rather than forcing patients into payer-defined narrow networks, patients should have the responsibility for choosing providers based on both cost and quality. However, it’s impossible for patients to compare prices on the over 7,000 CPT codes and over 700 DRGs used in today’s payment system, particularly when they don’t even know for sure which of those services they’re going to receive. The accountable payment models described above would define prices based on a patient’s health problems rather than the procedures they receive, so patients can choose the physicians and hospitals that offer the best combination of price and outcomes for the specific health problems those patients are facing.

Right-Sizing Healthcare Delivery for Choice and Competition

Of course, consumer choice can only control prices if there are choices of providers available. If we design payment systems that do not require physicians and hospitals to consolidate into large systems, and if we remove unnecessary regulatory requirements that increase costs for smaller providers or prevent them from participating in better payment models, then it will be more likely that patients will have multiple providers to choose from.

Purchaser-Provider Collaboration to Find Win-Win-Win Solutions

Physicians and hospitals will need to collaborate to determine what the right amount of care is for a patient population and how much it will cost to deliver that care. Purchasers will need to implement new payment systems and patient benefit designs that support the better care that providers want to deliver. Consequently, payment reforms have to be designed in collaboration with providers, not imposed on them by payers. In many cases, all of the stakeholders can “win” – i.e., patients can get better quality care, purchasers can spend less, and providers can be more financially viable – if they work together in a collaborative way to design “win-win-win” payment reforms. Instead of purchasers and providers treating each other as the enemy, and focusing on ways to beat the other in a war over prices, they need to recognize that each can help the other win.

Fortunately, a growing number of communities have neutral conveners ready to help find win-win-win solutions. Regional Health Improvement Collaboratives – non-profit multi-stakeholder organizations focused on improving healthcare quality and reducing costs – can facilitate discussions between purchasers and providers and provide the objective data analysis both sides can trust in designing truly higher-value healthcare delivery and the payment systems needed to support it. Purchasers and providers need to recognize the value of this kind of service and use it to move to better payment and delivery systems as quickly as possible.